Will US Airways Be Next to Offer a Revenue-Based Frequent Flyer Program?

Delta has been rumored to be on the verge of converting to a revenue-based frequent flyer program.

I heard quite a bit after the story broke that Delta folks were apoplectic at the leak, that there was a lockdown, but like many such things the hordes subsided and the rumor mill has been mostly quiet. My hunch has been that after the leak their executives took better care of their documents and were more careful holding their tongues, rather than that the airline had abandoned its plans.

While any move towards a revenue-based program might cause some to immediately think of United’s CFO commenting that some of their members are over-entitled, this airline after all seriously considered minimum revenue thresholds for its elite tiers, my thoughts went elsewhere: the summer 2002 move by US Airways to count only full fare tickets towards elite qualification.

Delta’s been looking at revenue-based programs, and the airline that took the first step towards ‘caring’ only about high revenue customers hadn’t done much along those lines since then.

In Randy Petersen‘s opening remarks to the June issue of Inside Flyer he notes that at US Airways Media Day he asked the question about whether they were considering a revenue-based program, and that the airline was less forthcoming about this issue than they seemed to be about any other issue on the table that day. Randy thinks something is up:

While I don’t know anything about Area 54 (the supposed top-secret area popular with UFO conspiracy theorists), I’m pretty sure that something is going on out there. You combine that with rumors coming from the greater ATL area and I’m telling you–people get ready. Are both US Airways and Delta considering changes to their existing frequent flyer programs featuring a conversion to revenue-based programs? With the changes that have already impacted this industry (miles as an industry?), there’s a very strong argument that this is the way of the future.

Me, I don’t think anything is imminent at US Airways. I don’t have inside knowledge, so I could certainly be proven wrong. But I have to believe that if US Airways is serious about acquiring American Airlines, then they have bigger fish to fry than remaking the mileage program. Especially moving to a revenue-based program, which would widely be viewed as a gutting of their loyalty proposition. The last thing they’d want to do is scare away all of the new customers they’d be bringing into the folks via American AAdvantage. They’ll at least tell everyone for awhile that they’re going to build a ‘best in class program’ that ‘combines the best of both airlines’ to ‘deliver world-class loyalty rewards’ for their members.

Now, I’ve written skeptically about a US Airways acquisition of American in the past, so that’s hardly definitive. But if they think they’re serious, then I don’t see change coming to US Airways in this regard over the next 18 months.

Perhaps that’s just my wishful thinking.

A change to revenue-based mileage-earning from flying activity wouldn’t be a huge deal, more miles are earned from non-flying activity than from flying, the question would be what earning rates would look like (whether it would just be an opportunity to give out fewer miles, or would be a shift in whom miles are given to).

And many airlines have revenue-based redemption as an option which complements award charts now, United and Delta both introduced theirs to co-branded credit card holders years ago and American more recently introduced theirs to elites-only, the ability to buy tickets with miles based on the price of tickets.

But what is usually meant by the introduction of a revenue-based program is the end of award charts, the replacement of earning points and spending points based on zones or distance with spending points based on the cost of a ticket. Which is the end of getting outsized value from points. And premium cabin tickets because almost impossible to obtain, because their cash price is often so many times that of a coach ticket. (Most airlines with revenue-based programs also have only one class of service and also limited international service.)

It’s hard to imagine the apocalypse to loyalty that would flow from this. While programs may wring their hands about rewarding the wrong people, or about high redemption costs that they need to manage, in the end these mileage programs are wildly profitable and it’s the smaller, less-profitable ones which haven’t branched as far out from driving business to the airline and into credit card, shopping, rental car, home mortgage, and other spaces. Why in the world would a multi-billion dollar company (the mileage program) risk its entire business model when it’s spinning off large sums of cash?

The credit card partnership with Juniper Bank (now with Barclays) funded America West’s acquisition of US Airways. American Express provided Delta hundreds of millions of dollars of extra liquidity by pre-purchasing Skymiles. United, fundamentally, flew through bankruptcy to support their co-branded credit card partner’s business. (The co-branded card issuer provided both debtor-in-possession financing and exit financing for bankruptcy, and pre-purchase of half a billion dollars of miles.)

And even from a loyalty perspective, it’s not the most revenue that a company wants to incentivize, it’s moving over incremental revenue at the margin, which is something that revenue-based programs often miss.

Ultimately, though, we’ll have to judge based on the particulars of whatever may be introduced, but revenue-based programs tend to be less rewarding and less aspirational — it’s not about the 25,000 mile ticket to Florida, but that not that many more miles can take you to Hawaii or to Italy or Asia, and not that many more miles can do so in a premium class of service. Frequent flyer programs have been the most wildly successful marketing vehicles ever developed because they tap into dreams.

Revenue-based programs are what airlines offer when they figure they have to offer something but it’s not really core to their business model, they figure lots of customers won’t pay enough attention (at least for awhile) to know the difference anyway.

There’ll be plenty of consultants and analysts who sell this as the next big thing, but for any program that does it, it’s likely cutting off their own income streams… not from the airline but from the mileage program itself.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community Milepoint.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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Comments

  1. That sort of change is why I no longer fly much with southwest. Just not the deal for me it once was. I hope they don’t make this change soon but. Bet it will come one day in the future.

  2. Hi Gary,

    You write:

    “And many airlines have revenue-based redemption as an option which complements award charts now, United and Delta both introduced theirs to co-branded credit card holders”.

    I have found the Delta awards but I cannot find anything from United. Could you share a link?

  3. How would this work in the framework of alliances? Members of partner airlines would still be able to redeem seats according to their own award chart, thus creating an opportunity for arbitrage for Delta/US flyers. I feel that a move to a revenue based model would be ineffective unless implemented alliance wide.

  4. Nate, many European carriers have already made their programs almost totally worthless by adding fuel surcharges to awards that are nearly as much as the same ticket would cost in cash, as well as cutting earning to 25% of miles flown (or even less) on most fares. This doesn’t seem to get in the way of their US-based alliance partners continuing to offer more or less decent value.

  5. Agree with Daninistl. I don’t fly them anymore or use their credit card anymore since they gutted their Rapids Reward program.

  6. I think Nate is right in how the heck will Skyteam pull off a switch if other Skyteam partners don’t follow suit? However, they do have an advantage that they don’t have any serious competitor partner in their domestic market like United has with US Air. (don’t think you can count Alaska….)

    Let’s hope Delta “wised up” as I think it is much harder to pull this type of thing off in the era of Facebook, social media, etc. It is a lot easier to educate those who “aren’t paying attention.” Honestly, if Delta was smart, they’d have an easier time just simply devaluing the award chart further which puts you closer to a revenue system anyway.

  7. Hopefully these changes will clear away all the low class and freeloaders that clog up first and biz class. Delta knows that their competition is not netjets for high revenue fliers. Most Americans should be taking the bus like they use to in the 1960s, the golden age of airtravel for the rest of us. As first gets more expensive it will get better for the rest of us.

  8. @Eric

    Let me give you a parallel example in the hotel world. SPG recently added free internet and 200 points (or something similar, yet small) as added amenities for their gold members.

    Many SPG members cheered the additions, I did not. Why not? The folks who already cheered the additions are current gold members. But these are folks *who would stay at SPG properties anyway.* It’s actually *costing* SPG real money for no added revenue, at least for those folks.

    Then there’s me. I don’t travel for business at all, it’s strictly leisure. For me, everything comes down to value. I’ll stay at SPG properties when they give me the most value, and I’ll stay at other properties when they don’t. A loyalty program is supposed to draw in my business when I otherwise wouldn’t stay there. (Otherwise, what’s the point?) It’s supposed to incentivize extra spend from me, or spend that would have gone elsewhere.

    So, back to SPG Gold. I value 200 points at about $8. I’m not sure how much I value free internet, because I try to avoid the computer when I’m on vacation. So even though the hotel charges $15/day for it, say I value it at $5. Is a $13/day discount going to get me in the door if I already deemed the hotel “probably too expensive”? No. $13/day doesn’t sway my hotel decisions.

    So, IMHO, SPG missed the boat. They’re giving away revenue to members who are already staying there, and not doing enough to bring in *new* revenue. That’s what Gary’s talking about when he refers to incremental revenue at the margin.

  9. Gary,

    Good observation about existing revenue based programs on other airlines. I never quite saw it in that light.

    And yes, I wholeheartedly agree that for the major carriers to go that route would be choking the goose that laid the golden egg. I don’t buy too many revenue tickets any more (I think I bought two in the last three years) but I’ve got over a million frequent flyer miles through CC’s and what not.

    Let me say this: I PAY ANNUAL FEES FOR REWARDS BASED CREDIT CARDS. When they’re good, I *don’t* cancel them; I actually keep them. Even if I don’t actually plan on using the card in the future, I’ll pay the annual fee at renewal if I get some nominal amount of miles. (I paid $85 for 10,000 Continental miles.)

    If the banks lose customers in droves, I’m sure they’ll give the airlines an earful, and it won’t be pretty.

  10. @Gary while I agree with most of your arguments… I would like to point out that a revenue based program like Southwest is doing pretty well on the credit card business

  11. @Gary,

    Looking closer at the United option you will find that you can only use miles from your so-called “Choice program balance”, i.e., United miles that you have earned from your United credit card issued by Chase. So miles earned in any other way (flying, shopping mall, etc) cannot be used for revenue tickets. Oh, and you get 1 cent per mile when redeeming your Chase originating miles for a revenue ticket. With Delta I seemed to remember that you can use miles originating for anywhere.

  12. The problem is these widely publicized studies that show Southwest having the best award availability – duh. That and the bad press about Delta’s own award availability, I can understand the temptation.

  13. @Carste Varming I’m not saying they’re the same thing, just pointing out that other programs have added this on a limited basis already

  14. There are “tweaks” that revenue based programs can offer to make them more attractive. For me, the Southwest program is compelling cuz points bookings are de facto refundable (if you cancel, points are added back to your account with no redeposit fee for everyone – not just top tier elites as in other programs). So I book with Southwest points when my plans are subject to change.

  15. If the airlines switch to a revenue based system there is no longer an incentive to use a branded airline credit card as opposed to a good cash back card. So for millions of credit card users (and flyers) the whole system collapses.

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